Interest rates in 2014 – up, down or steady ground?

Mar 12, 2014

Property buyers can expect the Sydney market to remain buoyant in 2014 following guidance from the Reserve Bank of Australia (RBA) that interest rates are likely to remain low at around 2.5% for the rest of the year.

It’s good news for property buyers with low rates reducing the overall cost of capital and giving borrowers the opportunity to accelerate the repayment of principal. It is also increasing competition amongst lenders, which means there are some attractive mortgage offers available.

Of course the flipside is that low rates encourage more buyers into the market, which has a flow on effect for demand and pricing.

In the minutes from its February meeting, the RBA noted that “the effects of low interest rates were clearly evident in the housing market.” However, they are not concerned about a dramatic collapse of the market stating that talk of a housing bubble was “excessively alarmist”.

The Bank’s stance on interest rates reflects its belief that, whilst risks remain, the outlook for the economy is largely positive. Specifically, it points to positive momentum in the US, Europe and Japan, with China also continuing to meet growth expectations.

Domestically, the RBA is encouraged by the positive signs for consumer demand, housing construction and business demand, as well as the weaker Australian Dollar. There are some concerns about the potential impact of the declining resources industry, weak labour demand and higher than expected inflation, but for now the Bank is comfortable that current monetary policy is striking the right balance.

In its February 2014 Interest Rate Outlook Report, St George Bank Senior Economist Hans Kunnen suggests the RBA has a balanced view of the Australian economy.

“We cannot pretend that a decline in resource project construction will not act as a drag on the economy. At the same time, there are areas of growth and these will be encouraged by a stronger global economy and by the low interest rate environment,” says Mr Kunnen.*

The favourable conditions have had a flow-on effect for the housing construction sector with an increase in dwelling approvals and new home sales.

“These conditions were expected to provide further support to new dwelling activity over the period ahead, and leading indicators of dwelling investment had increased,” the RBA minutes noted.